This time last year, property pundits were convinced that Sydney was on the cusp of a new boom. Years of sluggish growth compared with rivals Brisbane and Melbourne appeared to be turning around, with first homebuyers boosting the market. Even the interest rate hikes that characterised late 2009 and early 2010 didn’t seem to dent market confidence.

Twelve months later, the situation is very different. The market has slowed to a crawl as the effect of the first homebuyers boost and those rapid interest rate rises worked their way through the system, with RP Data recording median value growth at a middling 6.6% for the year leading up to October 2010 – down from 9.85% the previous year. A sluggish winter not helped by political uncertainty led to a spring selling season that was sharply curtailed by the Melbourne Cup day hike in interest rates by the RBA, and the ensuing mortgage interest rate rises by the major lenders. This saw auction clearance rates dive below 50% and affordability concerns – never far away in the chronically undersupplied NSW capital – rear their head anew.

So, what’s the outlook for 2011? Well, like many other markets around Australia, the prognosis is one of a slow year ahead.

“I’m a firm believer that the Sydney market will be flat for price growth over the coming year,” says RP Data’s research director Tim Lawless. “Volumes will remain steady, however.”

“I don’t see the market doing much at all,” adds John Lindeman, chief property consultant at Property Power Partners. “First homeowners have all but disappeared and there’s likely to be even fewer next year, interest rates will continue to go up, and consumer confidence is down.”

There’s another factor which is also contributing to short-term uncertainty: the state election. While it seems like a foregone conclusion that the current State Labor government will be ejected, it will still impact the market.

“The housing market will slow down,” says Lindeman. “Everything slows down as buyers and changes. That’s even the case when the outcome is fairly certain.”

Even so, both analysts shy away from the idea that values will fall, thanks to the demand for housing in the face of population growth. In fact, Sydney’s well-documented development shortfall and affordability crunch for first homebuyers is leading to a hike in rents – which is welcome news for embattled investors.

“Rental yields are already above average,” says Lawless. “They’re at 4.2% for houses and 4.9% for units: that’s just above the median average, solely due to housing demand. That’s just the medians, too – in some areas, yields are even higher than that.”

Louis Christopher, managing director of SQM Research, agrees. His projections indicate vacancy rates will remain tight over the next 12 months, leading to rental increases of at least 7–9%, and possibly more.

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